History of UK House Prices

8/8/2019 History of UK House Prices

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History of UK House Prices

UK house prices have fallen significantly in the first 6 months of this year. It is the first major fall in

annual house prices since the great crash of 1989 to 2004 (where prices fell 20%)

The driving force behind the falling house prices are the shortage of mortgages available, especially

for first time buyers. Even though mortgage interest payments are not particularly unaffordable, many people

cannot raise a sufficient deposit or get any kind of mortgage. This is in sharp contrast to the years leading up to

2007, where the mortgage industry was very competitive and banks were keen to bring in new lending criteria

making it easier to lend.

The change in nominal house prices since 1994 is still very large. Even a modest fall of 10-20% will

leave house prices significantly higher than in 1994.

UK House Prices Index Historical Data

This shows the history of nominal and real house prices in the UK between 1975 and 2008. It is based on data collected by the Nationwide, one of the UK's biggest mortgage providers. Nominal House prices = actual monetary value Real House Prices = House prices adjusted for inflation


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Graph of UK House Price Index since 1952

Year Nominal House Prices Real House Prices

1975 Q1 10,388 72,405

1975 Q2 10,728 68,363

1975 Q3 10,978 66,980

1975 Q4 11,288 66,609

1976 Q1 11,519 65,458

1976 Q2 11,739 64,332

1976 Q3 11,999 64,285


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1976 Q4 12,209 62,610

1977 Q1 12,409 60,469

1977 Q2 12,689 59,284

1977 Q3 12,970 59,690

1977 Q4 13,150 59,627

1978 Q1 13,820 61,626

1978 Q2 14,491 62,923

1978 Q3 15,912 67,863

1978 Q4 16,823 70,491

1979 Q1 17,793 72,443

1979 Q2 19,075 74,832

1979 Q3 20,485 75,292

1979 Q4 21,966 78,589

1980 Q1 22,677 77,402

1980 Q2 23,348 75,390

1980 Q3 23,628 74,729

1980 Q4 23,497 72,922


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1981 Q1 23,730 71,883

1981 Q2 24,098 69,573

1981 Q3 24,188 68,728

1981 Q4 23,798 65,966

1982 Q1 24,177 65,913

1982 Q2 24,679 65,217

1982 Q3 24,969 65,662

1982 Q4 25,580 66,779

1983 Q1 26,307 68,348

1983 Q2 27,386 69,720

1983 Q3 28,175 70,809

1983 Q4 28,623 71,105

1984 Q1 29,675 73,295

1984 Q2 30,833 74,614

1984 Q3 31,254 74,959

1984 Q4 32,543 77,192

1985 Q1 33,200 77,724


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1985 Q2 34,174 77,395

1985 Q3 34,700 78,340

1985 Q4 35,436 79,668

1986 Q1 35,647 79,560

1986 Q2 37,015 81,515

1986 Q3 38,251 84,151

1986 Q4 39,593 86,050

1987 Q1 40,882 87,787

1987 Q2 42,987 90,858

1987 Q3 44,434 93,731

1987 Q4 44,355 92,568

1988 Q1 45,091 93,651

1988 Q2 48,932 99,236

1988 Q3 54,352 108,692

1988 Q4 57,245 112,187

1989 Q1 59,534 114,793

1989 Q2 62,244 116,674


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1989 Q3 62,782 116,567

1989 Q4 61,495 111,958

1990 Q1 59,587 106,591

1990 Q2 58,982 100,821

1990 Q3 57,245 96,248

1990 Q4 54,919 90,917

1991 Q1 54,547 89,818

1991 Q2 55,418 89,340

1991 Q3 54,903 88,114

1991 Q4 53,635 85,253

1992 Q1 52,187 82,524

1992 Q2 52,663 81,541

1992 Q3 52,243 80,949

1992 Q4 50,168 77,400

1993 Q1 50,128 77,841

1993 Q2 51,918 79,361

1993 Q3 51,746 78,874


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1993 Q4 51,050 77,539

1994 Q1 51,327 77,849

1994 Q2 51,362 76,555

1994 Q3 51,731 77,052

1994 Q4 52,114 77,141

1995 Q1 51,084 74,948

1995 Q2 51,633 74,385

1995 Q3 51,334 73,757

1995 Q4 50,930 73,079

1996 Q1 51,367 73,315

1996 Q2 53,032 74,751

1996 Q3 54,008 75,977

1996 Q4 55,169 77,157

1997 Q1 55,810 77,587

1997 Q2 58,403 80,170

1997 Q3 60,754 82,590

1997 Q4 61,830 83,386


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1998 Q1 62,903 84,569

1998 Q2 65,221 86,091

1998 Q3 66,366 87,317

1998 Q4 66,313 86,858

1999 Q1 67,478 88,761

1999 Q2 70,010 91,127

1999 Q3 72,362 94,113

1999 Q4 74,638 96,355

2000 Q1 77,698 99,906

2000 Q2 81,202 102,515

2000 Q3 80,935 101,999

2000 Q4 81,628 102,214

2001 Q1 83,976 105,277

2001 Q2 87,638 108,540

2001 Q3 91,049 112,700

2001 Q4 92,533 114,669

2002 Q1 95,356 118,100


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2002 Q2 103,501 126,658

2002 Q3 110,830 135,166

2002 Q4 115,940 140,128

2003 Q1 119,938 144,151

2003 Q2 125,382 148,949

2003 Q3 129,761 153,727

2003 Q4 133,903 157,680

2004 Q1 140,225 162,912

2004 Q2 148,462 171,634

2004 Q3 153,482 176,395

2004 Q4 152,464 173,559

2005 Q1 152,790 173,471

2005 Q2 157,494 176,762

2005 Q3 157,627 176,268

2005 Q4 157,387 175,001

2006 Q1 160,319 177,801

2006 Q2 165,035 179,882


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2006 Q3 168,460 182,049

2006 Q4 172,065 184,006

2007 Q1 175,554 186,258

2007 Q2 181,810 189,810

2007 Q3 184,131 191,490

2007 Q4 183,959 188,849

2008 Q1 179,363 182,997

2008 Q2 174,514 174,514

2008 Q3 165,188

2008 Q4 156,228

2009 Q1 149,702

2009 Q2 154,066

House Prices Between 1975 and 2007 Q4.

Nominal House prices increased by 1,672% or 174,000 Real terms house prices increased by 119,085 or 164%

Between 1994 and 2008 Q2,

Nominal house prices have increased by 123,000 or 241%


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Biggest Falls in House Prices

The biggest falls in house prices occured between 1989 Q3 and 1993. House prices fell 12,614 or

20%

House Prices since 1985

PROBLEMS IN UK HOUSING MARKET

This is part of a series on problems in the UK Economy

The UK housing market is one of Britain's favourite topics of conversation. There is eith much (barelydisguised) gloating over how much your house is worth; or there is also a large section of new first time

buyers who despair at the cost of trying to buy a house. There also seems to be endless speculation about

the future direction of house prices. When it comes to house price predictions you can take your pick

anything between a 40% fall in prices and a 50% increase in the next 10 years. But, behind all the

newspaper headlines what are the real issues at stake in the housing market?


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Problems in the UK Housing Market

1. First Time Buyers Priced Out of the Market.

According to the Halifax, average house prices are just over 197,000. Therefore, even on an income

multiple of 4 times salary, there are not may young people who earn sufficient salary to be able to buy a

house. Furthermore, many mortgage lenders are now expecting a bigger deposit; 10% of 200,000 is

difficult to save when you consider many graduates are leaving university with big debts. Due to the UK's

obessesion with owning a house, first time buyers have simply tried to get on the housing ladder through

taking out riskier mortgages such as interest only, or 100% mortgages. Therefore, young people have

become increasingly indebted in order to buy a house. The rising house prices has also caused

intergenerational inequality - people who bought 10 years ago have made capital gains, but, young people

will be forced to take on increasing levels of debt.

Possible solutions:

y Subsidised Mortgages for young peopl, but expensive and doesn't tackle fundamental problem ofhigh prices.

y Subsidised government building of housing. High prices are due primarily to the shortage ofsupply. Building new houses will ease the long term lack of affordability.

y A move away from home ownership to renting - like on the continent. This requires a change inpeople's expectations and may prove quite difficult.

2. Volatile Prices

The UK housing market is susceptible to booms and bust. For example, in the late 80s, house price

inflation exceeded 30%; this was followed by a year of house prices falling 15% (1992). In recent years,

house prices have risen by over 20% and now many fear a housing price drop. The volatility of the house

prices in the UK is due to a number of factors.

y People choose variable mortgages and take out large loans. This means mortgage payments are ahigh % of income (over 20%) therefore, any change in interest rates has a significant impact on

affordability.

y Shortage of supply exaggerates any change in demand.Possible Solutions.

y Encourage fixed Rate mortgagesy Encourage renting.y Encourage the building of houses in property hot spots (not always easy to do.)

3. House Price Drop could cause a recession.


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If house prices do fall in the UK, it will have an adverse impact upon consumer spending and consumer

confidence. House prices have become a key barometer to the economy. Rising house prices have also

been used to fund equity withdrawal and have caused a drop in the savings rate to 3%. If house prices do

fall, it will create negative equity and discourage spending; if the price falls are rapid this could cause a

recession in the UK.

Solutions.

y If consumer spending does fall the MPC is likely to cut interest rates because inflation willhopefully be less of a problem. However, the MPC won't cut rates just to try and boost the

housing market - their primary target is low inflation. Furthermore, some would argue house

prices need to fall to correct a long term imbalance.

4. Shortage of Land

Many problems in the UK Housing market stem from a shortage of supply. However, the problem is that

building new houses is not so straight forward especially in the South East. Local councils are reluctant to

allow the building of houses on greenbelt land. They are also reluctant to encourage more pollution and

congestion in their area. The planning process tends to make it difficult to develop new land and local

councils usually have a NIMBY approach. More houses are fine - but not in this district.

Solution:

y Encourage building on brown field sites with greater housing density e.g. like the continent. 5. Mortgage Crisis

Due to problems in the US subprime market, there is difficulty in financing mortgage lending. This is

causing several mortgage products to be withdrawn e.g. 125% mortgages and 100% mortgages.

y However, maybe the idea of a crisis is exaggerated. True, mortgage companies are becomingstricter on lending, but this is perhaps a desirable response to a period of very lax lending criteria.

Although it causes some inconvenience, especially for first time buyers, it does at least prevent

future problems in the market.


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Why UK Housing Market Suffers Boom and BustCycles

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Why The UK Housing Market Experiences Boom and Bust Economic Cycles

A boom and bust cycles refers to the rapid increase in prices, followed by a period of falling house prices. This

has occured on numerous occasions in the UK housing market, most notably during and after Lawson boom of

the late 80s

Reasons For Boom and Bust

1. Limited Supply.

Many factors make it difficult for the market to build new houses. When house prices rise, we dont see a

corresponding increase in supply, simply because house builders take time to overcome planning restrictions.

Therefore, any change in demand creates a volatile swing in prices. If supply were elastic this wouldnt occur.

Local councils have a strong ability to restrict the number of new houses built. Local councils also have an

incentive to stop houses being built, because voters prefer less supply and higher prices for their existing

homes.

2. Changing Interest rates.

Most homeowners in the UK choose a variable mortgage. This means that as the Bank of England base rate

changes, their monthly repayments change as well. Therefore, a small increase in interest rates can have a big

impact on peoples mortgage interest payments. If interest rates increase, then people may struggle to meet

their mortgage commitments and therefore, will have to sell. Because Mortgage payments are a big % of

income, this is a serious problem for many homeowners.

In other countries, more homeowners choose fixed rate mortgages; therefore, they are less sensitive tointerest rate changes.

3. Buyers take out Large Mortgage to Get on Property Ladder.

Because UK house prices are so expensive, people have been taking out unconventional mortgages to be able

to afford a house. These mortgages are a high ratio compared to their income. This means that mortgage

payments take nearly 50% of peoples disposable income. Therefore, it is easy for mortgages to becomeunaffordable.

4. Volatility in Mortgage Lending.

One of the biggest reason for the current volatility in house prices, is the uncertainty in the mortgage sector. In

2006-07 mortgage lending was relaxed; low deposits were needed; banks were willing to lend high loans to

income ratio. However, after the credit crisis, mortgage finance has been drying up and many potential

homeowners are no longer able to get the necessary mortgage finance to buy.


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5. Boom and Bust in Economic Cycle.

If the economy goes into recession, demand for houses will fall. When growth is high, people have the

confidence to borrow more. Demand tends to be income elastic. However, house prices falls in 2008 are due to

other factors.

6. Speculators

Rising prices encourage people to try and make capital gains. They buy houses to gain income and a rise in the

value of housing. When prices are rising, there are more buy to let investors pushing up prices. But, when

prices fall, speculators are likely to sell their houses and prevent a fall in wealth.

7. Poor Memories.

People often have poor memories and during a boom forget that house prices can fall. They assume that house

prices will go on rising forever.

Economic Impact of a Housing Crash

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If house prices fall significantly, they will not just leave homeowners with negative equity, they will also cause

serious economic consequences for the wider economy.

These are some of the most important factors.

1. Negative Wealth Effect.

Homeowners will see their major asset (housing) decline in value. Some who bought recently will see negative

equity (House is worth less than mortgage value). Therefore, they will have less confidence to borrow and

spend; they will try to increase the value of other savings, leading to a decline in consumer spending.

Householders will find it more difficult to remortgage, especially for the purpose of equity withdrawal.

Therefore, there will be a significant fall in spending caused by equity withdrawal. In the 1990s and 2000s

equity withdrawal played an important role in boosting spending and growth in both the UK and US.

2. Fall In Aggregate Demand. / Economic Growth

Because of the lower confidence and lower consumer spending there will be a fall in aggregate demand. It is

worth pointing out that housing is a significant determinant of spending in the economy. Consumption

accounts for 66% of AD, and housing is by far the biggest form of wealth. Housing has also become an

important barometer of the state of the economy House price falls make front page headlines.

The fall in spending and aggregate demand leads to lower economic growth and possibly recession.

Lower growth will also increase unemployment.

3. Lower inflation Rates.


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The slowdown in consumer spending will reduce inflationary pressures in the economy. This may enable the

MPC to cut interest rates as it will be easier to maintain the inflation target of 2%.

Evaluation

The impact depends on other variables in the economy. For example, if there was an increase in exports and or

government spending, then AD may continue to rise. However, at the moment, the underlying prospect of the

UK economy looks weak. Industrial output and investment show signs of weakness.

Inflationary pressures may not fall because at the moment there is cost push inflation factors. For example,

rising oil and food prices is pushing up the inflation rate despite a slowdown in the economy. This makes it

difficult for the MPC to cut interest rates because inflation is going above their target. Therefore, they will be

unable to cut rates to help consumers and the housing market.

In the US, the government have tried very hard to avoid a recession. Government have cut taxes, and the Fedhave cut interest rates to 2%. So far the US, have just about avoided a recession.

House prices fell in the early 1990s by 15%, this was a significant factor in leading to a recession in the UK.

Housing Crisis

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There are many factors which led to the booming prices. In the UK, a large % of this

represented the fundamental disequilibrium between supply and demand. But, it was

also helped by:

Increased availability of unconventional mortgages A strong social desire to get on the property ladder at all costs The reluctance of the Government to increase supply sufficiently A reluctance of the MPC to give any importance to a booming housing market,

focusing narrowly on CPI inflation.

The fall in house prices is a combination of declining affordability but, also the real

crisis in the mortgage industry sparked by the US subprime crisis. It is this lack of

affordable mortgages which is having the biggest bearing on house prices in the UK.


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There are other factors suggested as well such as greed, estate agents and poor

financial regulation.

Who is To Blame for the Housing Boom and Crisis

With house prices falling in the US and now UK, it is worth asking who if anyone is

to blame for the boom and bust in the Housing Market? This might help avoid a future

boom and bust in the future.

1. Monetary Authorities.

In the US, we can point to how low interest rates were in the period 2002-2003. With

interest rates less than 2%, mortgages became affordable to an increased number of

income groups. The Fed appeared unconcerned about the housing boom and did

nothing to prevent house prices rising rapidly. The same occured in the UK, the MPC

only targetted CPI inflation. By stating there was nothing to worry about, the

monetary authorities encouraged over confidence in the housing market and led to

rising prices. If the Fed or MPC had taken action to take the steam out of the housing

bubble, they would have avoided much of the boom and bust.

The Monetary authorities will defend themselves by arguing that the housing market

doesnt fall into their remit. ALan Greenspan claims there was nothing he could do to

influence asset prices. [link] Their target is primarily low inflation and maintaining

economic growth not house prices. The Fed argued that in 2002, the US faced a real

prospect of an economic downturn and they kept rates low to avoid this.

However, the weakness of this argument is that the housing market has a very

powerful influence on the economy. Because housing accounts for so much wealth in

the economy, falling house prices are sufficient to tip the economy into recession.

Therefore, Monetary authorities need to consider stability in the housing market as

necessary precursor to a stable economy.


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The Government

The government will say that they are not responsible for house prices; they aredetermined by supply and demand in the market. However, one area where the

government could have done more is in the regulation of financial markets.

Particularly in America, the mortgage sector behaved in a short sighted and

irresponsible way, lending to people who couldnt afford payments. In this particular

area, the government made a mistake in assuming the financial system could regulate

itself. Better regulation of the financial sector could have placed greater restrictions on

lending to new mortgage holders. If people needed to demonstate a better ability to

repay, many of the subprime defaults could have been avoided. In the US and UK,

there is a strong belief in the efficiency of markets and somehow government

regulation represents a failure. But, the subprime crisis illustrates how unrestrained

free markets can create serious problems for the whole economy.

In the UK, the government could have done more to increase supply, especially in

areas of high demand. Increasing supply would have helped deal with the shortage of

housing that was a major factor in rising prices.

Speculators.

It is argued this housing boom saw a rise in the number of housing speculators, such

as buy to let investors. This new speculative element pushed up prices; but now they

are falling, they will leave the market and cause prices to fall by a bigger amount.

However, most buy to let investors say they are investing for the long term not the

short term. Nevertheless any increase in the number of speculators people looking

for capital gains as opposed to buying a house to live in it, will make the housing

market more volatile.

Estate Agents

Estate agents could be blamed for talking up the market. nncouraging higher

prices by mentioning the strength of the housing market and how unlikely it is that

house prices will fall. However, I find this argument rather tenuous. Estate agents may


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talk up the strengths of the housing market, but this is insufficient to increase prices

unless there are real reasons behind them. At the end of the day, prices are determined

by what people are willing to pay, not what estate agents want them to go for.

Just Market Forces.

The other argument is that the boom in house prices merely represents the working of

market forces. With a shortage of supply in the UK, and rising demand, people were

willing to pay higher house price / income ratios causing prices to rise sharply. This

same factor explains why prices in the US are falling.

Greed

I put this down because I see it mentioned so often in newspaper comments. I think it

is a poor argument and reflects what could be termed taxi driver economics. Buying

a house, even at the height of the boom, was not necessarily a reflection of greed; but,

simply a reflection that buying a house offered various advantages to homeowners as

opposed to renting.. It wasnt greed that caused people to sell house prices at a high

price, it was a reflection of the market forces currently in operation.

However, one area where the greed argument is relevant is in the selling of subprime

mortgages to people who had poor affordability. Mortgage companies were mainly

interested in selling mortgages and not whether they provided a realistic loan to

vulnerable people. It was this misselling of mortgage loans which caused so many

problems in the credit markets.

Documents

History of UK House Prices